Your Friend Wants to Borrow $2,000, Pay It Back in 1

question 132

Multiple Choice

Your friend wants to borrow $2,000, pay it back in 1 year, and is someone who keeps his or her word.The friend agrees to repay you $2,080 in 1 year.The bank interest rate is 5 percent.Which of the following statements is(are) true?

• A) You will be financially worse off if you make the loan rather than deposit $2,000 in the bank.
• B) You will be financially better off if you make the loan rather than deposit $2,000 in the bank.
• C) The present value of $2,080 payable in one year with an interest rate of 5 percent is $1,904.76, which is less than the value of the $2,000 you have been asked to loan.
• D) A and C are true.

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Definitions:

Return On Assets

A financial metric that measures the profitability of a company relative to its total assets, indicating how efficiently a company uses its assets to generate earnings.

Price-Earnings Ratio

A valuation metric for stocks, calculating the ratio of a company's current share price to its per-share earnings.

Market Price

The current value at which a good, service, or asset is traded on the market, determined by supply and demand dynamics.

Earnings Per Share

An economic indicator that measures how much of a firm's earnings are distributed across all shares of common stock, demonstrating the firm's financial success.